The US Fed has overseen what has been, in effect, the biggest quantitative easing programme the world has ever seen. But that has now ended. And it says US bond interest rates, which are still near enough zero for all practical purposes must rise. Not just by a bit, either. They are apparently forecasting 1.5% by the end of 2015, 2.75% by the end of 2016 and 3.75% by the end of 2017.
Now what the US Fed does is something that is its business and it will be entirely unaffected by anything I write here. There is little I can say or do today about which I can have more confidence than that. But this seems like recklessness in the extreme to me.
Cheap money has kept the US economy going when other economies - especially in Europe - have at best staggered along.
And when US business has refused to repatriate money to the US to invest in its economy and at the same time has invested more in tax inversions than it has in anything to benefit humankind it has been US government money that has filled the gap.
Now I wholly accept that the result has been too much support for banks. And the profile of US government spending is not what I would choose, by a very long way. But the reality is that low interest rates have worked, even if the policy could have been considerably improved.
The need now is to improve how the money is spent, and not to start upward pressure on interest rates by the Fed clearly thinks otherwise. Three things will surely follow.
First, that interest rate upward pressure will result in the same pressure in other markets so worldwide rates will rise.
Second, households in a great many economies the world over will tip over the brink and so default on debt on a massive scale.
Third, the banks will face anther crisis that we are wholly unable to address this time round. And we can be sure that this time the impact will be firmly on shareholders first: that is the known plan for handling such an issue on Wall Street, That contagion will spread and with it pensions will collapse. All of which means that the investment community, and its customers, who are meant to be appeased by this policy have the most to fear from it. No wonder the FT says they are forecasting much lower rate rises.
The rate rises the financial markets are forecasting - of 2% by the end of 2017 according to the FT - may be too much for the market to bear without recession resulting. Those the Fed wants simply guarantee economic chaos.
I just have to hope 2015 isn't the year economic lunacy breaks out in central bank circles. But there's absolutely no guarantee it won't. And I admit I worry about that.
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Can you just clarify which US bond interest rate you are referring to ?
US Fed rates
I believe that is the US equivalent of our base rate, not a bond interest rate, but happy to be proved wrong.
It’s the Fed rate and is, of course a base rate
And influences all other rates as a result
The Fed funds rate is not a bond interest rate. There is undoubtedly a link between the 2, but they are not the same thing. The US treasury do not generally issue debt at the Fed Funds rate. They issue at the lowest yield that the market will fully subscribe for the issue.
Please do not ignore the significance of the rate
Playing pedantry does you no favours
You may see it as pedantry, but I’m pointing out a factual error in your statement that invalidates the proceeding comment. A US bond yield and the US Fed Funds rate are two different things. One is dictated by the market, one is dictated by the Central Bank.
This is important because your statement that US Bond interest rates are likely to rise to 1.5% (from their current levels of either 1.52% for the 5 Year or 2% for the 10 Year) is incorrect. If you had stated the Fed Funds rate was set to rise to those levels, then there would be no error to point out.
No that’s pedantry
As the FT also believes the two are clearly related
Stop wasting my time
I believe that my statement ‘There is undoubtedly a link between the 2’ would have negated your need to justify that the FT agree with you. That is not in dispute.
If anything constructive is likely to have come from this exchange, I suppose it illustrates to other commenters the manner in which they likely to get treated if they are so bold as to point out a factual error in any of your comments.
There was no error
And the argument was logical
I simply do not know what you are seeking to prove